April 4, 2019 / 11:26 AM / 3 months ago

UPDATE 1-Hong Kong to cap securities margin financing

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By Alun John

HONG KONG, April 4 (Reuters) - Hong Kong’s securities watchdog plans to limit the amount brokers can lend to purchase shares to five times their capital, reflecting concerns about financial stability in the Asian financial hub.

Margin financing is an important source of revenue particularly for the city’s small brokers, but last year the Securities and Futures Commission (SFC) said it was concerned the activity posed a risk to financial stability in Hong Kong markets.

At the time, the regulator proposed a series of measures, including capping margin loans at between two and five times the capital of the brokerage.

The SFC on Thursday issued the final version of the rules, which as well as imposing a cap on margin financing at the higher end of its proposed range, also require brokers to control their exposure to individual clients to avoid concentration risks, and strictly enforce margin calls.

The rules will take effect on Oct. 4.

“Managing margin lending risk is crucial to ensure brokers’ financial stability and protect market integrity,” SFC Chief Executive Officer Ashley Alder said.

Small brokers opposed the SFC’s proposal to impose a stricter cap on margin financing, saying they feared it would reduce trading turnover.

Most respondents to its consultation had suggested a limit of five times a broker’s capital, the SFC said on Thursday.

Christopher Cheung, a stockbroker and member of Hong Kong’s legislature representing the financial services sector, said in an email on Thursday that given the SFC insisted on capping margin financing, the level of five times capital was “barely acceptable”.

The SFC had said last year that brokers’ margin loans increased nine-fold between 2006 and 2017, while the quality of margin loans had declined, describing the situation as “very worrying”.

The regulator had also warned that a stock market correction should not be underestimated. (Reporting by Alun John; Editing by Kim Coghill and Sherry Jacob-Phillips)

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